Small Business Advocates Push Credit Card Reform

Many small businesses are foregoing bank loans and turning to credit cards as a means to run their operations, and that could mean trouble, according to small business advocates.

"There has been a wave of bank consolidation and many small business owners are less likely to have access to an independent bank that's receptive to their needs," said National Small Business Association President Todd McCracken in an interview in his downtown D.C. offices. "Big banks are largely driven by credit-scoring models that don't necessarily fit with small businesses."

Concurrent with the consolidation, banks have become more sophisticated in marketing credit cards to small businesses, he said.

According to an NSBA Web site survey, 23 percent of firms (of all sizes) in 1996 said they used a credit card in the last 12 months to meet their capital needs, while almost 44 percent had the same response in 2007.

"The terms of a credit card often change and when a bank changes an interest rate it's often unclear to its user," said McCracken. "We think more disclosure and notification is necessary."

The D.C. lobbying group is still feeling out its position on the issue but definitely supports "some kind of reform" said McCracken.

"Today, many banks just stick a paper-thin brochure with a lot of fine print in with your bill notifying you of changes," said McCracken. "These documents should notify you more clearly in advance if your interest rate is going to change."

The Federal Reserve in May proposed a new set of credit card regulations that would require more transparency from the credit card industry, such as offering customers an additional 30 days of advance notice if the credit card firm makes any changes in interest rates or other key terms. The public is available to comment on the proposal through September.

The NSBA plans to file a comment, which McCracken says will be "generally supportive of the Reserve's efforts," but likely will recommend some "fairly technical specific changes in what they now require."

"The more you regulate the credit card industry, costs are going to go up for someone and we're concerned that they could go up for small businesses," he said. "But the marketplace now isn't functioning well."

McCracken predicts that the Federal Reserve won't sit on the issue. House Financial Services Chairman Barney Frank (D-Mass.) has said the Fed better do something on credit card reform or he might propose that the responsibility of regulating the credit card industry be taken from the Fed and given to another agency.

Some consumer advocates say the Federal Reserve's approach doesn't go far enough. For example, it doesn't address charging interest on debt that already has been paid. If a small firm buys three computers for $8,000 and then pays $6,000 of that bill on time, some credit card firms will charge interest on the entire $8,000 rather than the remaining $2,000.

NSBA is keeping an eye on a reform bill, S. 1395, offered in May by Sen. Carl Levin (D-Mich.). The "Stop Unfair Practices in Credit Cards Act" imposes restrictions on interest rate increases and requires annual audits of the credit card operations and procedures. It's currently sitting in the Senate Banking, Housing and Urban Affairs Committee, but could see some movement after the August congressional recess.

NSBA has not publicly supported the bill, but agrees with some parts of it. "It's something we're taking a look at right now, and clearly, improved reporting is part of the solution," McCracken said.

Rep. Carolyn Maloney (D-N.Y.), who chairs the Financial Institutions and Consumer Credit Subcommittee, plans to hold a roundtable this summer that will bring together credit card issuers, consumer advocates and some members of the House Financial Services panel.

Small Business readers - have you turned to credit cards as a means to keep your business humming? Do you feel like you understand the terms of your credit card agreement and its changes?

By Sharon McLoone |  July 19, 2007; 6:00 AM ET Regulation Legislation
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i try to stay well away from business credit cards for my design firm. that is a road that only leads to trouble

Posted by: todd sanders | July 20, 2007 1:45 AM

As a bank teller, I can tell you that many small business customers manage their business checking accounts the same way they run their personal accounts: badly. Using the bank's overdraft limit, at $25-$35 a pop is not good for anyone (except the bank).

The interest rates on lines of credit, loans, and credit cards are MUCH cheaper than these overdraft and bounced check fees. Paying a $27 overdraft fee for a $300 purchase at Office Depot is an interest rate of several hundred percent. By comparison, paying prime plus 2%, or 10.25%, on a line of credit is dirt cheap. Even the credit card is a better deal.

Yet so many business clients don't do the math and avoid getting any type of lending. By the time, they've realized their mistake, it's often too late. You want to get the line of credit in place, BEFORE there's a financial emergency.

Posted by: Ken L | July 22, 2007 1:30 PM

Hey, I have found 0% credit on 10 years !!!
Here -

Posted by: Thomas | August 11, 2007 12:25 PM

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